Zoellick’s call for gold standard faces steep hurdle

Countries may see standard based on several currencies instead

AshleyP. Lau

SAN FRANCISCO (MarketWatch) — Gold investors and analysts on Monday said World Bank President Robert Zoellick’s call for a new gold standard would likely fall flat, though some welcomed the fresh attention on the record-breaking metal.

“The gold standard is not going to happen anytime soon,” said Bill O’Neill, a principal at commodity consultancy Logic Advisors. It would require a concerted political will that just isn’t there, he added.

Zoellick, a former banker at Goldman Sachs Group Inc.
GS
and deputy secretary of state under George H. W. Bush, suggested a return to a modified gold standard in an opinion piece in Monday’s Financial Times.

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,” he wrote.

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” he said, as he exhorted world leaders to increase international cooperation and to agree on structural reforms in the upcoming Group of 20 meetings in South Korea. Read more on Zoellick’s comments on gold.

Zoellick’s piece succeeded in propelling the subject, the perennial domain of die-hard gold enthusiasts, to a wider audience Monday.

Broadly speaking, the gold standard is a system in which the monetary unit is a fixed weight of gold. Under the Bretton Woods agreement, which was put in place after World War II, several countries pegged their exchange rates to the U.S. dollar, which in turn was fixed to the price of gold at $35 an ounce, creating a system that implicitly pegged currencies to gold. Bretton Woods collapsed in 1971, when President Richard Nixon ended the dollar-gold peg, and by 1973 exchange rates were allowed to float.

Zoellick’s comments were definitely beneficial for gold, according to Steven Butler with Canaccord Genuity in Toronto.

Gold is “a pseudo-form of currency,” he said. “It’s not that we’re headed back to a gold standard, per se, but we’ve seen a lot of central-bank attention focused on gold being quite positive.”

While some cheered that someone with Zoellick’s political clout appears to be championing a bigger role for gold, it may be too early to say whether it will have a lasting impact on market activity, said Colin Cieszynski, an analyst with CMC Markets in Toronto.

“Right now, we just have to sit back and say, ‘That’s nice,’ and see if anyone else finds that to be true as well,” he commented.

Debt worries

The metal’s trading action Monday largely revolved around investors’ focus on a flare-up of European sovereign-debt worries, as the cost of insuring Portuguese and Irish debt climbed to records.

“Ahead of the G-20, no one wants to be in any paper currency,” said Adam Klopfenstein, a senior market strategist with Lind-Waldock in Chicago.

Gold started Monday in the red, pressured by a rising dollar. It later turned higher and surpassed $1,400 an ounce, hitting a fresh record.

For December delivery, gold
GCZ10
added $5.50, or 0.4%, to settle at $1,403.20 an ounce on the Comex division of the New York Mercantile Exchange. It was gold’s third consecutive record high. Read more in Metals Stocks

Peter Buchanan, an analyst with CIBC World Markets in Toronto, said the world is more likely going to see a regime where countries base their currencies on a number of currencies rather than on gold.

Miners edge higher

Gold miners also gained Monday, though analysts attributed much of the rise to a spillover in enthusiasm from earnings season.

The NYSE Arca Gold BUGS index
HUI
which includes major gold miners, rose 3.3% on Monday. The index has gained 32% so far this year.

Gains were mostly about another big week for gold miners’ earnings, said Buchanan. Canadian gold miners, for instance, mostly have reported earnings that beat expectations, and “there’s more good news to be heard,” he added. “We’re seeing a pure earnings momentum.”

A system using gold as a type of anchor could stabilize gold and turn what is still a thinly traded market into a more orderly, less volatile one, according to James Cordier, a portfolio manager at Optionsellers.com.

Currencies would also benefit, he said: “We’d have our paper [money] tied to something.”

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